Optimal Portfolio Construction from Selected Stocks of BSE Sensex using Sharpes' Single Index Model

Abstract

Investments are often preceded with a wide scale of analyses, especially when it is equity investments, as it involves higher risk and vulnerability. While selecting stocks for constructing a portfolio, prime consideration for any investor is to attain high returns with minimum affordable risk. William Sharpe's Single Index model helps in analysing the individual stock return and risk and allows a possible combination of these stocks to form a portfolio that gives the best possible return at minimum affordable risk. The present study is based on constructing an optimal portfolio using Single Index model from the thirty stocks representing the BSE Sensex. The stocks are ranked according to their excess return to beta ratio. A cut-off point is determined and all the stocks above the cut off point has been used to construct an optimal portfolio based on a calculated proportion of investments in the selected securities.